I’m a tax lawyer based in San Francisco (www.WoodLLP.com), but I handle tax matters everywhere. I enjoy untangling a tax mess from the past, disputing taxes with the government or planning taxes for the future. One of my specialties is advising about lawsuit payments. Whether you’re receiving or paying a legal settlement, you can probably improve your tax position. I write frequently about taxes, from expatriation to sales tax, from selling your company to restitution. I’ve written over 30 tax books, but my best seller is still Taxation of Damage Awards and Settlement Payments. Contact me at wood@WoodLLP.com.

Taxes are on everyone’s mind right now. Much of the debate is about who pays, who doesn’t and who should. But it’s also about fairness. Is it fair for everyone to pay the same rate, or for those who earn more to pay more?

This isn’t a new question. In 1953, two University of Chicago law professors, Walter J. Blum and Harry Kalven Jr. publishedThe Uneasy Case for Progressive Taxation, an influential work addressing our tax system. With a flat tax, everyone pays the same percentage rate. Those with higher incomes simply pay larger amounts.

With progressive rates, additional dollars are subjected to higher marginal rates even though the first dollars qualify for lower rates. Progressivity has resulted in some bizarre history, including a time when U.S. taxpayers paid 70% on some income. Rates were even higher in England.

More than mere rates, what most people find inequitable is Byzantine complexity and endless special rules. Some seem arbitrary or flatly wrong. Like so much else in life, it hurts most in your backyard.

Unfortunately, even these rules are limited. What’s more, they expire at the end of 2012. That means you can be taxed when you have a debt forgiven and must dig in your pocket to pay the IRS.

What other tax rules seem especially unfair? If you’ve been a successful litigant you may feel skewered by paying tax on monies your lawyer receives. If you hire a lawyer on contingency and settle a lawsuit, a third or more of the money will be paid directly to your lawyer.

Even so, the IRS treats it as 100% paid to you. In two cases, you won’t pay tax on the lawyer’s fees. The first is if 100% of your damages aren’t taxable (say an auto crash injury). The second is if your case is against your employer. See Six Tax-Wise Ways To Reduce Your Legal Bills.

What else is unfair? It depends on which tax rule hits you hardest. Apart from rate discussions, greater simplicity and transparency would be big improvements.

Robert W. Wood practices law with Wood LLP, in San Francisco. The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009 with 2012 Supplement, Tax Institute), he can be reached atWood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

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It would have helped if you listed the fundamental reasons for Federal income taxes, none of which is to raise revenue for the Federal Government to meet its obligations.

We are taxed to, –make us accept the otherwise worthless paper called the dollar –manage aggregate demand and reduce inflationary pressures –redistribute and distort incomes –allow government to select winners and losers by subsidizing private enterprise –measure the costs of Federally funded public purpose program

Monetary sovereign, by definition, eliminates the need to raise revenue to spend. Our Federal government must issue the currency before it can tax or borrow it. The Treasury and Fed have created byzantine accounting practices to satisfy archaic legislative recordation needs which feed into CBO’s own record keeping and reportage.

What most Americans harbor are notions of gold standard principles abandoned in August, 1971, but which remain driving forces leading to the mismangement of fiscal and monetary policy today. We don’t need a balanced budget and deficits are nothing more than accounting realities; the Federal governments deficit is equal to the penny to net financial assets in the non-government sector.

Because a monetarily sovereign nation is the monopoly issuer of its currency there should only be one tax, and that should be to eliminate the likelihood of inflation, because the Federal Government never runs the risk of insolvency.

All current tax code provisions are either discriminatory or punitive given current, longstanding core and real inflation rates in the U.S. A large part of our economic stagnation is due to the overtaxation of workers and the maldistribution of monetary palliatives.

In a capitalist economy sales are required to generate economic growth. Therefore, income must not be constrained by taxation preventing economic growth.

BTW, the study you reference, “This isn’t a new question. In 1953, two University of Chicago law professors, Walter J. Blum and Harry Kalven Jr. published The Uneasy Case for Progressive Taxation, an influential work addressing our tax system.”

I’m not sure I follow all your numbers, but in concept I think it has a lot to commend it. I recall that flat or modified flat tax proposals got some traction some decades back. Some studies suggested that even fairly low rates (I recall 17% I think) should produce ample revenue. One could even use a surtax exemption concept (that is used in the corporate tax law in some cases), so that once you got over a certain income level, you would lose your exemption for your first 50K.

It’s hard to drum up much interest in these ideas today. But to me the biggest advantage would be simplicity. Our system is so horribly complex and so completely riddled with special rules and qualifications that I question whether any of us can follow it. Thanks.

I pretty much agree with what you have said, except that it seems to me that you are getting the cart before the horse, as the saying goes.

You are accepting the tax laws, rates, rules, and regulations as being true and correct, albeit in some cases unfair, and underlying you are accepting that the government needs to collect the taxes it does and perhaps more than it does and that each one of us is obligated to pay his fair share of the amount the government has determined is needed.

That’s totally bogus. Tax money has a purpose, a singular purpose, and that is to pay the costs of the legitimate activities of government. And I have a serious problem with the activities of our federal government. This is not a new problem. I dare say that this problem has existed since immediately after our Constitution was originally ratified. The Founding Fathers determined that the federal government was to be limited, very limited, and therefore its expenditures were and are to be very limited. They sealed it up with the Tenth Amendment, giving all powers not specifically enumerated in the Constitution to the states and to the people. Ever since then politicians, bureaucrats, and even the Supreme Court have made every effort to finagle their way around this to the point that we have this monstrous federal government mostly doing unconstitutional things and charging us for them. A quick read of the 2012 federal budget tells me that at least 69% is unconstitutional. That includes the 45% for Social Security and Medicare.

Is anything going to be done about this? Not as long as politicians and bureaucrats are in control of the government. I believe that our only real solution is for a new generation of Founding Fathers, willing to risk their fortunes and lives, to arise and instigate a New American Revolution. It seems to me that, according to our Declaration of Independence, we not only have the right to do this, but the duty.

When thinking about taxation whether it should be progressive or flat most people tend to think only about the federal income taxes we pay and not all of the other taxation that we pay. Most of which is neither progressive or flat, but regressive taxation. Property taxes are regressive taxation because someone who owns outright a $200K house and makes $200K a year pays the same dollar amount in property taxes that his neighbor who has his $200K house mortgaged to the hilt and only makes $100K a year.

Sales tax is another regressive form of taxation because when someone making a million dollars a year goes and buys a tank full of gas for their car they pay the same dollar amount in taxes as the cleaning lady making $10K a year to fill up her gas tank. As a percentage of their incomes the cleaning lady is paying a much higher rate of taxes.

The same goes for all of the taxation that we pay in the form of fees like fishing licenses, tags for vehicles, etc…

So although I agree that the tax code needs to be simplified a great deal I do not think that we need to adjust or do away with one of the only progressive taxes that we have. It helps to offset the unfairness of the rest of the taxes we all pay.